Building and accumulating wealth in Texas are significant milestones for a person but it is also equally important to protect one’s hard-earned assets. One can lose these assets through lawsuits , power of sale, or judgments to name a few. To reduce your chances, safeguarding your assets is the key.
In this article, we will explore the definition of asset protection, common risks aimed to be mitigated, types of assets, and exempt and non-exempt assets from liens and seizure under Texas laws.
Understanding Assets and Asset Protection
An Asset is any valuable resource owned by an individual or entity. Asset protection focuses on protecting and preserving these assets from seizure by creditors and predators using legal means. Simply put, asset protection is not about engaging in illegal or fraudulent activities or getting away from any liabilities, rather, it uses legal vehicles in minimizing risks and substantial losses in your assets for possible future issues. Others say that it is a process of converting your non-exempt assets out of your personal name into protected entities or structures which provide asset protection.
It is thus important to make an asset protection plan in advance as a pre-emptive measure. If only performed after, you will have limited options available that could not adequately provide the protection you actually need. While 100% asset protection is not guaranteed, increasing your layers of asset protection can help in managing and minimizing potential risks.
Common risks asset protection aims to mitigate
Lawsuits
Having owned substantial assets may attract others from potential legal claims and lawsuits against you. Asset protection primarily aims to reduce the risk of losing valuable assets in the event of legal disputes or prevent any lawsuits. Protecting assets ensures financial security by shielding valuable properties and resources from being seized in the event of judgment. In effect, it helps in continuing the business operations even in the face of legal challenges.
Bankruptcy
Once legal suits are filed against individuals and entities, financial issues may arise leading to a possible bankruptcy. Even so, filing bankruptcy may not always be bad since in some cases, your properties will be exempt by law from being sold to pay debts. As such, structuring your companies in a way to maximize exemptions provided under Section 41 of the Texas Property Code will mitigate unfounded events.
Divorce settlements
Divorce can lead to parties being vulnerable about their future. Concerns of financial status and whether future finances will change the lifestyle. It is thus important to prepare for the inevitable. Identifying separate and community properties can be complicated, time consuming, and expensive. Hence, you must be prepared in order to be spared from possible uneven distribution.
Tax liabilities
Asset protection planning can give a hand in minimizing tax burden. Gifting properties in the form of trusts and lifetime gifting, structuring your company, and using stepped-up basis by reducing or avoiding taxes on inherited assets.
Professional malpractice claims
A possible malpractice verdict may be incurred by physicians, architects, engineers and other professionals. These verdicts do not usually exceed insurance limits. Despite this, it is important that asset protection planning is placed for those areas where these professionals do not view as potential problems including business succession plans for their practices and general estate planning needs.
Types of Assets
There are two broad categories of assets, namely: Tangible and Intangible Assets.
Tangible Assets are basically items which have physical forms that a person can touch. Examples of which are cash, stocks, gold, painting, boats, cars and yachts. Intangible Assets are those that do not have any physical form but hold value. Examples are Copyrights, Trademarks, Goodwill of a business, contracts, stock certificates to name a few.
Exempt and Non-Exempt Assets
Some of these assets have been afforded protection under the Texas Constitution, Texas Property Code, Homestead law and other relevant laws while others are not. Hence, identifying which asset needs more attention and planning is crucial in maximizing the opportunities of asset protection.
Assets which are protected by laws are called exempt assets while those not are non-exempt assets. The following are the four key areas of property exemption: Homestead, Personal property, Life Insurance and Retirement Plans.
Homestead Exemption
Under Article 16, Section 50 of the Texas Constitution and Section 41 of the Texas Property Code, a residence or homestead is exempt from claims of creditors except those valid encumbrances properly fixed on the property. This exemption protects the land and permanent improvements thereon but does not cover the contents or furnishings. Only individuals may take advantage of homestead protection.
Homesteads are classified into Urban and Rural. Urban homestead may consist of 10 acres of property as long as these lots are contiguous. Meanwhile, a Rural homestead may consist of 200 acres and 200 acres for a family and single person, respectively. This exemption has no dollar limit on the value of the property except the following:
Under the 2005 Bankruptcy Reform Act, homestead exemption is limited to $125,000 unless the homestead has been owned by the debtor for more than 1,215 days (4o months) on the date of the bankruptcy petition is filed.
Under same-state roll over, homestead exemption is limited if the debtor owns his current residence less than 40 months unless either (1) he purchased his current residence with proceeds from sale of his previous residence and that the latter was owned for more than 40 months; or (2) when the period of ownership of previous and current residences will aggregate for 40 months.
Personal Property Exemption
Under Section 42 of the Texas Property Code, personal properties are exempt from garnishment, attachment, execution or other seizure if the property is provided for a family and has an aggregate fair market value of not more than $100,000 exclusive of liens, security interest and other charges encumbering the property. For single individuals, it requires that the aggregate fair market value of the properties does not go over $50,000.00.
Meanwhile, Section 28, Article 16 of the Texas Constitution prohibits wages for personal service be subjected to garnishment unless made due to court order for child support or spousal maintenance.
Life insurance and Annuity Contracts
Under Article 21 of the Insurance Code, policy proceeds and annuity contracts are protected from the reach of creditors in that such benefits: inure exclusively to the benefit of the designated beneficiary, are fully exempt from execution, attachment, garnishment or other process, may not be seized taken or appropriated to pay any debt or liability of the insured or any beneficiary, and fully exempt from all demands in bankruptcy proceeding of the insured or beneficiary.
Retirement Plans
The term retirement plan falls under the “Qualified Savings Plan” is considered to the exempt from federal income tax.
Other exempt properties under Section 42 of the Texas Property Code are the following:
Cemetery plots
Home furnishings
Live stocks such as cattle and horses, farm implements and any provisions for consumptions
Items used for work in trade or profession
Jewelry and family heirlooms
Sports equipment
Vehicle per household occupant
College savings plans
Clothes
Firearms
Pets
Non-exempt properties
No-exempt properties are anything that does not meet the criteria for an exemption under the Texas Constitution and above-stated laws. The following are some of the non-exempt assets:
Cash
Stocks and bonds
Real Estate
Partnership and Business Interests
Oil and gas royalties
Cars, boats and planes
Asset protection is a vital component of sound financial planning. Understanding the nature of asset protection, types of assets, and common risks aimed to be mitigated can safeguard one’s wealth and ensure a more secure financial future by an individual or entities and their children and beneficiaries. It is thus advised to consult a Business Attorney to help you navigate the complexities of asset protection aligned with your unique situation and goals. At Texas Real Estate and Business Law Firm, PLLC, our attorneys are here to help and guide you. Call us!